China broadband market set for sea change

China Telecom (00728.HK) and China Unicom (00762.HK), two of the nation’s big three state-owned telecoms service providers, are facing more competition in the fixed-line broadband business as authorities seek to allow private players into the segment by enabling the lease of last-mile networks.

According to state news agency Xinhua, the Ministry of Industry and Information Technology is seeking further reforms in the telecoms sector. Apart from implementation of the mobile virtual network operator (MVNO) trial across the nation, authorities will also begin improving the network connectivity access arrangement. That could result in opening up the broadband connectivity business to private enterprises, throwing a challenge to the state-owned firms.

The government’s bid to open the last mile infrastructure, which connects telecom networks to end-users’ homes, to private enterprises will stimulate market competition as well as offer more choices to users, especially those living in urban areas.

People in China have long been complaining about the lack of choice in fixed-line broadband services. Meanwhile, poor network speed is also a concern. The nation does not figure among the top globally in service speed, despite being the world’s largest broadband market with more than 180 million broadband lines.

Against this backdrop, the government has unveiled a “Broadband China” policy in a bid to enhance the nation’s digital competitiveness, which is seen playing a vital role in boosting domestic consumption and spurring the broader economy. Authorities have said that they aim to have 250 million broadband users by the end of 2015.

To achieve the target, China Telecom and China Unicom have boosted capital expenditure on fixed-line broadband networks across the nation. As broadband infrastructure is capital-intensive and will take many years to pay off, the investment has put additional financial burden on the two firms.

Opening up last mile connectivity to private enterprises will lead to more competition for the two state-owned titans, but the firms can offset the impact through revenues gained from leasing their networks to private players. China Telecom and China Unicom can rent both last mile and backbone networks to authorized parties. That should help alleviate the financial burden on the two companies, as well as speed up the return on their network investment.

Just like the introduction of MVNO in the mobile market, the new players in the broadband market will need to rent broadband infrastructure and bandwidth capacity from the incumbents in order to be able to roll out their services. To differentiate themselves from the existing operators, new players will need to provide innovative services and packages to lure users.

From a business perspective, the new players will not have the ability to initiate a price war as they have to bear fixed costs on bandwidth and line rental. What they can do is to bundle value-added services like high-definition video content, interactive video games as well as smart home systems to prompt users to pay more. All in all, the new competition should help enhance the product and service offerings in the industry, rather than trigger an unhealthy price war.

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